The Pentagon’s central payroll and accounting office, which pays out tens of billions of dollars a year to U.S. service members and defense contractors worldwide, likes to boast of a decade worth of clean audits by outside firms hired to check its books.

The Defense Finance and Accounting Service was created in 1991 by Dick Cheney, then the secretary of defense, to help the government’s biggest agency get on top of its spending after President Ronald Reagan had overseen a massive military buildup the previous decade to counter the Soviet Union. Cheney also sought to prevent repeats of the $435 hammers, $37 screws and other embarrassing disclosures of excessive spending.

But more than two decades later – after another big military buildup, this time in response to the Sept. 11, 2001, terror attacks – a McClatchy investigation has found troubling signs that the system set up to strengthen accountability for Pentagon spending is broken.

Among the signs of dysfunction, according to interviews with key players, internal emails, memos and other documents obtained by McClatchy, are:

– Outside audits by a certified public accounting firm of the Defense Finance and Accounting Service’s books turned out to be shoddy, according to the Pentagon’s own accountants, although that same CPA firm had endorsed the agency’s previous fiscal records for years.

– In reaction to the skeptical evaluations, Pentagon officials pressured their accountants to suppress their findings, then backdated documents in what appears to have been an effort to conceal the critiques.

– The Defense Department’s Office of the Inspector General, which was brought in to watchdog the audit, not only helped squelch the critical work but also allowed the outside firm to be paid despite the serious questions about the quality of its work.

“The unchecked and wasteful spending at the Pentagon has been well-documented, starting when I uncovered $700 toilet seats,” said Sen. Chuck Grassley, an Iowa Republican who has chronicled profligate Pentagon spending for years. “Attempts to steer the ship in the right direction is a massive undertaking that can only be done with a competent inspector general willing to be a junkyard dog and not afraid to knock some heads.”

Grassley said the Defense Finance and Accounting Service and the inspector general’s office both failed in their roles. The senator is about to release a report that supports McClatchy’s findings.

“The outside audit firm rubber-stamped DFAS’ practices using defective audit methods,” a draft of Grassley’s report concludes. “For its part, the (inspector general) was prepared to call foul on (the accounting firm) for substandard work but was somehow steamrolled by DFAS. The IG failed to do its job.”

The problems at the Pentagon’s central accounting office suggest one reason why a long list of presidents, lawmakers and defense secretaries have failed to curb Pentagon excess or even establish a straightforward record of Pentagon spending.

The matter has prompted a probe of more recent Pentagon ledgers by the Government Accountability Office, the investigative arm of Congress.

Bridget Serchak, a Pentagon inspector general spokeswoman, would only say that her office never issued the review in question. She declined to comment on the questions raised by McClatchy.

The Defense Finance and Accounting Service, which has 13,000 employees in 10 offices around the globe, is an arm of the Pentagon comptroller, Robert Hale.

Navy Cmdr. William Urban, chief spokesman for both Hale and his central accounting office, said neither the comptroller nor his staff unduly pressured the inspector general’s accountants or their bosses.

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“We categorically deny that the comptroller or his staff attempted to exert any kind of inappropriate influence on the (inspector general’s office) in connection with the financial statement audits of the Defense Finance and Accounting Service,” Urban said.

CliftonLarsonAllen, a Minneapolis-based Top 10 accounting company, now owns the federal audits practice of the outside audit firm, UKW. It didn’t respond to questions from McClatchy. UKW previously strongly defended its audits of the central accounting office to Pentagon officials.

At first glance, this saga might seem like an inside bureaucratic tangle over boring audits.

But with the Defense Finance and Accounting Service handling most of the money Congress gives the Defense Department – $615 billion in fiscal 2013 – even a very low percentage of errors could be costing taxpayers tens of millions in lost funds.

An accurate look at the ledgers of the central payroll and accounting office could be expected to prevent such losses.

Accountants with the inspector general’s office, the primary watchdog of the Pentagon, which accounts for one-fifth of all federal spending, tried to provide such an assessment.

The accountants repeatedly told their bosses that a clean audit of the Defense Finance and Accounting Service’s books for fiscal 2008 should be overturned because it failed to document $4.4 billion in adjustments and had other poor internal controls, according to Grassley’s report.

But the bosses told the inspector general auditors to downplay their concerns and to endorse the UKW audit.

Then, in reviewing the 2009 audit, the inspector general accountants repeatedly asked UKW auditors to do more work to support a clean opinion, but the firm refused, according to participants and Grassley’s report.

In early 2010, the accountants concluded that UKW’s analysis simply did not meet minimum auditing standards required by the federal government. This time, their bosses went along, at least initially.

At a Jan. 27, 2010, meeting and in an email two days later, Patricia A. Marsh, then the Pentagon’s assistant inspector general for financial management, told Defense Finance and Accounting Service officials that her office was going to issue a “non-endorsement” letter – a formal rejection that would signal the clean 2009 audit was based on inferior work.

That’s when James J. Cornell, a former Defense Finance and Accounting Service senior executive who was then inspector general of the House of Representatives, said he complained about the disparaging report to Pentagon higher-ups, and it was abruptly killed.

The Defense Finance and Accounting Service had drafted Cornell to oversee its response to the inspector general’s fiscal probe as the accounting service’s former head of internal review.

In April 2010, three months after being backed by their bosses, the inspector general’s two lead accountants of the audits received letters informing them that their assignments had been “terminated,” according to documents reviewed by McClatchy.

Even more unusual, the terminations were retroactive to Jan. 27, 2010 – the precise point when the inspector general’s office had informed the Defense Finance and Accounting Service that it would not endorse the 2009 audit.

“They wanted to get rid of us because we were seeing the naughty-naughty,” said a member of the inspector general’s audit team, who spoke on condition of anonymity for fear of retaliation.

The retroactive terminations effectively wiped the slate clean, turned back the clock and removed from the official record the inspector general accountants’ critical findings that the audit did not meet professional standards.

The termination letters were signed by Normand Gomolak Jr., the principal contracting officer with the Defense Finance and Accounting Service.

Gomolak did not respond to questions from McClatchy.

UKW, meanwhile, was paid the outstanding bills for its 2009 audit of the accounting service, even though the Pentagon inspector general’s top lawyer had advised against making the payments.

Left unclear is how an employee of the accounting service, the target of the outside audits, could have removed the inspector general’s accountants.

Cornell, who told McClatchy he had pushed to halt the inquiry, said someone high up at the Pentagon authorized the termination letters, but he would not identify the person.

Cornell, however, defended the terminations, contending the inspector general overreached.

“Basically you had an unchecked (Pentagon) IG running around as a bully,” Cornell said. “It was supposed to be a quality-control review. It was never meant to be a re-audit. When it turned into a re-audit, they pulled the plug.”

Such interference by an inspector general for a major legislative body into the work of the inspector general for a major executive agency is very rare.

“This is the first I’ve ever heard of such an instance,” said Mark Jones, executive director of the Council of the Inspectors General on Integrity and Efficiency, told McClatchy on Thursday. “It actually surprises me.”

Jack Armstrong, who oversaw the inspector general probe as its audit program manager, said his accountants followed government-wide procedures. He said it’s not up to the target of a Pentagon inspector general probe to set the parameters of the inquiry.

“Neither the DFAS audit committee nor the DOD comptroller have the right to circumvent the authority of the Office of the Inspector General,” Armstrong said. “The standards and rigor required for auditing the financial statements of the Department of Defense cannot be trivialized or dismissed as over-effort and waste.”

Danielle Brian, executive director of the Project on Government Oversight, a nonpartisan watchdog group in Washington, agreed. Inspectors general at all federal agencies are supposed to be completely independent, she said.

“A good inspector general would not allow agency representatives to interfere with their ongoing work,” Brian said. “The agency can respond to their work, but it shouldn’t be able to reach in and stop the work.”

Grassley blames weak officials in the Defense Department Office of Inspector General, whom he says have yet to be held accountable for caving to pressure. The senator said he would ask the Council of the Inspectors General on Integrity and Efficiency to look into the performance of the Pentagon’s inspector general’s office. The council, a government agency, has the power to investigate abuse by inspectors general.

Daniel R. Blair, a top inspector general manager who helped oversee the inspector general probe, has been promoted twice and is now the deputy inspector general for auditing. Blair did not return calls from McClatchy.

Meanwhile, the outside auditing firm UKW received close to $150,000 from the Pentagon for the suspect 2009 work, according to Armstrong.

“To successfully root out waste day in and day out, there must be a top-notch audit capability in the hands of an inspector general who is ready and willing to use it effectively,” Grassley told McClatchy.

In this instance, he asserted, the inspector general’s office “allowed the department’s central finance and accounting office to run roughshod over the contract, the law, audit standards and independent oversight.”

Grassley, who was expected to release a report on irregularities at the Defense Finance and Accounting Service and the Defense Department Inspector General Office this week, said the inspector general accountants were performing their work properly – at least until someone stopped them.

Several inspector general employees involved in the audits went to Grassley to object to their office’s handling of the matter.

“We thought management was on board with us, then out of the blue they changed their minds,” an inspector general source, who asked not to be identified for fear of retaliation, told McClatchy.

Jim Minnery, a former Defense Finance and Accounting Service accountant, said his warnings about widespread problems at the agency went unheeded as well.

He said he left the accounting agency in frustration in 2006 because his bosses weren’t interested in tracking the mountains of money that passed through it.

“When I was there, DFAS would brag that they were getting a clean audit,” Minnery told McClatchy. “We (accountants) would just laugh out loud. Their systems are so screwed up.”

Minnery described a lucrative audit mill in which private certified public accounting firms make millions of dollars each year providing financial seals of approval that the Pentagon and other federal agencies then point to as proof that their congressionally approved funds are not mismanaged.

“The reason the Defense Department gets these clean audits is because these firms that audit them want to do more business with the Pentagon,” he said.

Taxpayers might have benefited from honest audits of the Defense Finance and Accounting Service.

Better bookkeeping during the period under scrutiny may have prevented the accounting service from giving a soldier active-duty pay totaling $185,000 for two years after he left the Army in 2009, a mistake that didn’t come to light until a December 2012 GAO report.

Better bookkeeping might have saved taxpayers the $13,208 that the central accounting office paid over more than three months, from Oct. 15, 2008, to Jan. 30, 2009, to a soldier who’d gone AWOL, another one of numerous errors revealed in the GAO report.

As the inspector general accountants were reviewing the central accounting office audit and reaching the conclusion that it was substandard, Mark Easton, a deputy to Pentagon Comptroller Hale, was getting weekly briefings on the probe, according to participants. A second inspector general participant, who said the process “was very ugly,” said Hale was able to pressure the inspector general’s office because he had large control of its funding.

“Hale and Easton let it be known that DFAS could not fail (its audits),” the participant, a former Pentagon inspector general official with knowledge of the inquiry and who requested anonymity in order to speak candidly, told McClatchy.

“Hale and Easton were in a frantic effort to show that major DOD agencies could receive clean (audits),” the participant said. “The prospect of any agency going backwards was not acceptable. The IG was supposed to support the party line.”

Hale spokesman Urban said, “The comptroller and DFAS did provide information to the (inspector general’s office), but as we stated they did not attempt to exert any kind of inappropriate influence.”

Pentagon insiders, however, said many employees fear crossing Hale because he crafts the agency’s annual budget as comptroller. They said the Defense Finance and Accounting Service has broad sway because it processes hundreds of billions in payments to military and civilian employees, and to contractors.

Brian, the executive director of the Project on Government Oversight, said that Pentagon accounting is under greater scrutiny from lawmakers as Congress seeks ways to cut spending and reduce the government’s $17 trillion debt.

“I’m not surprised that the Pentagon would be doing everything they can to try to cover up evidence that they’re not as financially responsible as they should be,” Brian said.